Resources: Organization Is A Little Too Closely Held

Q: I’m a realtor that deals in foreclosed houses. I have applied for 501(c)3 status because I want to turn some of these houses into residences for the homeless in our community. I will serve as the executive director and run the business portion of the nonprofit. I’m hiring my sister, who is a licensed social worker and case manager to deal with the individuals who move into these homes. In filling out the papers for the IRS I listed the two of us as directors and officers, along with a third person we know. I’m at the point where I’d like to begin building a larger board, but I don’t really know where to start.

A: I’m glad you want to build a larger board, because it is essential. But, before discussing how you can do this, I feel the need to suggest that you rethink the structure you have already put in place. Inherent in it are a number of conflicts of interest that – if the IRS even grants your organization nonprofit status in its determination letter – will set off warning bells for many community leaders and potential donors, making it difficult to gain support for this worthy project.

The first is the familial relationship. Nonprofits are formed to serve the community. When they become a family affair, there is always a concern that the organization might end up serving the family instead. Because of this, the IRS will often turn down applications where it is evident that the board or staff will be dominated by a family. Clearly, you and your sister both have needed skills and the proper credentials to take on the roles you have designated. That helps. And, if you and she have different last names, you may pass under the radar screen with the IRS. But, in your own community where people are more likely to know your relationship, the question of who you are really doing this for can’t help but be on their minds – even assuming you both have sterling reputations.

The second potential for conflict is the fact that you and your sister will serve in the dual role of staff and board. This is never wise. The board has to make decisions regarding the staff, such as when the organization can afford to start paying salaries or providing benefits without negatively impacting services. You would be making these decisions for yourselves. Under nonprofit law, “insiders” – any persons who can influence a decision – cannot unduly benefit from their relationship with the organization without risking significant fines or the organization’s nonprofit status. (For more information, see “Serving a Dual Master Can Be Dangerous.”) Again, I must clarify that I’m not suggesting that you would make decisions that would trigger these penalties, but you don’t want people wondering if you have.

The third potential conflict – made all the more potent by the first two – is that you are opting to have staff serve as your officers. While this is allowed by many states, it’s usually seen in the larger, more “corporate” organizations such as hospitals and universities. Generally, in organizations such as yours it’s far more common to have directors serve as officers – an arrangement that introduces important checks and balances, especially around money and contracts. This is because you have more people looking at or reviewing the decisions that are made or the actions that are taken. The way things are, the community may question both why you have chosen to depart from the more typical structure and whether there are sufficient protocols in place to ensure good stewardship.

You may opt to keep the structure you currently have despite these potentials for conflict and concern. After all, you may never face any problems. However, if you decide not to make changes I would look to protect the organization by giving thought to how you can best communicate with the community proactively to allay any discomfort that could arise.

Certainly, creating a larger board is one way to help mitigate some of the potential conflicts. This is particularly true if you take advantage of the additional people by shifting to them some of the responsibilities you and your sister are currently taking on.

So, to increase the size of the board, begin by determining the organization’s vision. What is needed overall to realize that vision? Specifically, what jobs must be done? How many people will you require to do these jobs (see “No Magic Formula for Computing the Size of a Board”)? What skills, experience and personal characteristics should these people have to help you move the process along quickly and effectively? What will you expect of those who say yes? Will they, for instance, have to make a financial contribution? What can you offer them in return for their service? Perhaps it’s specialized training on the issue of homelessness or the opportunity to lead the community on this issue. Going through the exercise of writing out a job description and two-way expectations list for your board members will help you in answering these questions. Once complete, these tools will also help the individuals you approach determine if service on your board is right for them.

Brainstorm the types of people that might want to take on the tasks you’ve identified. Don’t just think the requisite lawyer and CPA. Homelessness is an issue that affects all of us. Business people, government officials, police, neighborhood watch captains, veterans, those who work in veterans organizations, the range of people dealing with the mentally ill, commercial and residential developers, city planners, transportation officials, food purveyors, religious leaders and economists are just a few of the types of people who might be interested in helping you on this project.

Consider where you are most likely to find these people. Is it through a local, state or federal agency, the media, the church, a university? Ask people you know for names of others you should be talking to in each of these arenas. Ask those individuals who else you should be speaking with. Keep widening the circle.

Every time you get a name or meet with someone, put that person on your mailing list. Let everyone on the list know about the work you are doing, the recognition you are getting, the events you are having. Put them on a committee to see how they follow-through. It will soon become apparent who you should ask to join your board.

One last note: The people you will most want to stand by your side are the ones who will likely run the other direction unless the potential conflicts noted above have been minimized. Therefore, you might want to talk to an attorney that specializes in nonprofit law to help you make appropriate changes to your bylaws.

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